Markets & Finance

S&P Cuts Delta Air to Sell


Delta Air Lines (DAL): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jim Corridore

Before special items, the company posted a fourth-quarter loss of $5.88, vs. $1.71 loss, which is worse than our $4.75 loss estimate. Delta burned through $636 million in cash, but maintained $1.8 billion in liquidity by drawing on credit facilities. Special charges of $1.4 billion leave stockholders equity at a $5.8 billion deficit, vs. a $659 million deficit a year ago. Delta has $600 million in debt due in 2005, $400 million to $450 million in pension cash funding due, and is burning through cash from operations. If Delta can maintain liquidity long enough to implement restructuring, shares could benefit, but we think it's too risky to wait. We are lowering our target price to $5 from $8.50.

EBay (EBAY): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

EBay shares were down in pre-market trading after the company posted, before certain non-cash items, fourth-quarter earnings per share of 33 cents, vs. 24 cents, in line with S&P's forecast but a penny below the Street's. Revenues rose 44% but were lower than expected. Sales and marketing expense was 11% more than we modeled. The holiday shopping season started slowly for eBay in the U.S. and Germany, and more was spent to stimulate demand. Given notable anticipated 2005 investments in China and PayPal, we are cutting our earnings per share estimate to $1.55 from $1.59. Based on a discounted-cash-flow analysis, we are cutting our target price to $96 from $119.

Citigroup (C): Reiterates 5 STARS (strong buy)

Analyst: Evan Momios, CFA

Citigroup posted fourth-quarter operating earnings per share of $1.04, vs. 91 cents, 2 cents below our estimate. We think results show a mixed quarter, with strong revenue growth the major positive. However we believe the use of releases from loan loss reserves, and negative operating leverage will disappoint investors. Citing mainly the absence of sizeable reserve releases, which we estimate accounted for about 7% of operating earnings per share in 2004, Citigroup guided for the low end of analysts' 2005 earnings per share estimate range. We are reducing our 2005 estimate by 22 cents to $4.28, and 2006's by 25 cents to $4.75. Our 12-month target price remains $57.

Qualcomm (QCOM): Maintains 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA

Qualcomm posted December-quarter earnings per share of 28 cents, vs. 21 cents one year earlier, excluding special items, in line with our estimate. CDMA handsets shipped in the first quarter were 40 million, vs. the company's estimate of 41 million. Chipset unit shipments were strong at 39 million, but Qualcomm is guiding that figure to to 35 million to 37 million in the second quarter. Although the company is reiterating its sales and EPS guidance for fiscal 2005 (ending September), it did lower its targets for the second quarter. We maintain our fiscal 2005 EPS estimate at $1.20, but we are lowering our fiscal 2006 forecast to $1.45 from $1.50. With net margins of 34%, $8 billion in cash, no debt, and a growth rate faster than its peers, we maintain a strong buy opinion on Qualcomm. /

AT&T (T): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Ma Bell posted fourth-quarter EPS of 78 cents, vs. 43 cents, ahead of our 56-cent estimate. Results were driven by lowered selling, general, and administrative (SG&A) and service costs, and an expected decrease in depreciation expenses. Revenues fell 10%, but were slightly higher than we projected on relative stability in business services. The company guided its 2005 revenues between $25 billion and $26 billion, below our original forecast; but operating margin guidance of low single-digits is above our projection. Following AT&T's earnings call, we now expect revenues to fall an additional 15% in 2005, on the heels of 2004's 10% decline due to pricing pressure, a pullback in consumer services, and the impact of regulatory changes. However, reflecting what we see as the full impact of fourth-quarter cuts in the workforce and marketing expenses plus service automation, we are widening our operating profit projection and raising our 2005 operating earnings per share by l3 cents to $1.73. We expect AT&T to use free cash flow to raise its dividend in 2005, supporting the shares. In our view, AT&T trades at a reasonable discount to peers.

Federated Department Stores (FD): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda, Michael Souers

According to unnamed sources cited by the Wall Street Journal, Federated is in preliminary talks to buy May Department Stores. The combined company would have sales of nearly $30 billion. The obvious potential synergistic benefits include reduced advertising and purchasing costs, and the ability to use its size to exert pressure on vendors, thereby increasing margins. However, the possible deal is far from complete, and will certainly draw interest from antitrust regulators. We are maintaining our earnings per share estimates and our $56 12-month target price as we await further details.

UnitedHealth Group (UNH): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Phillip Seligman

UnitedHealth's fourth-quarter operating earnings per share of $1.09, vs. 83 cents is 2 cents above our estimate. We are encouraged by declines in the medical loss and selling, general, and administrative cost ratios, and see more progress in 2005 on moderating medical cost trends and rising productivity. We think UnitedHealth will continue to gain share, based on our view of good management execution and a growing range of products and services. We are increasing our 2005 earnings per share estimate by 15 cents to $4.90. Based on a belief that UnitedHealth merits a wider p-e premium to peers' 15 times, we are raising our estimated forward p-e to 21 times from 19 times, and our target price by $12 to $103.


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